On Wednesday, Russian President Vladimir Putin escalated the geo-economic war between his country and the West by suspending gas deliveries to Poland and Bulgaria, citing the two countries’ refusal to pay in Russian rubles.
The move, denounced by the West as “blackmail,” once again demonstrated Putin’s belief that Russia’s status as an exporter of raw materials will allow it to resist and counter the crippling sanctions imposed on its economy since the invasion of Ukraine.
In reality, however, Putin’s move is akin to bringing a knife to a gunfight.
The decision to suspend gas deliveries to two European nations will not only fail to strengthen the Russian economy, but will significantly increase the Kremlin’s long-term economic losses.
But to understand why Putin’s move will not deliver the desired result, we must first analyze his motivations for doing so.
Sanctions have deprived Russia of hundreds of billions of dollars worth of foreign reserves, Russian imports are collapsing amid restrictions on dual-use and computer technologies, and Western companies are withdrawing from Russia or “self-sanctioning” by refusing to sell products there.
Putin, however, still appears to be under the impression that he can win the economic war being waged by his invasion of Ukraine. On the surface, there seems to be some reason for the confidence shown by the Russian state: the ruble has more than recovered its pre-sanctions value, hitting a two-year high against the euro on April 27, and Russia is once again increasing its foreign currency holdings thanks to skyrocketing hydrocarbon prices.
All this, of course, contradicts the real state of the Russian economy. First, sanctions-induced supply chain disruptions are crippling Russia’s production capacities. In March, for example, there was a whopping 72 percent drop in passenger car production in the country. It is also almost certain that the Kremlin will formally default on its foreign debts in the coming days, making financing a future reconstruction of the economy extremely difficult. Furthermore, Russian wealth abroad is increasingly under threat and the much-lauded recovery in the exchange rate has only been achieved thanks to extreme capital controls.
The Russian Central Bank and Putin’s advisers in the finance and economy ministries know that the ruble that holds its value depends overwhelmingly on hydrocarbon prices and continued Russian state control over trade. They are also wary of how much the ruble’s liquidity has already decreased in light of existing sanctions on Russia’s banking system. As Putin’s brutal war against Ukraine continues, sanctions are expected to widen. Washington has warned that it may yet completely cut off the ruble’s convertibility and that there is no significant Western demand for rubles.
This is precisely why Putin has ordered European gas companies to pay in rubles for natural gas they buy from Russia. Payments for gas in local currency would leave the window open for ruble convertibility, something the Kremlin desperately needs given that oil prices are unlikely to remain this high permanently.
Right now, the world financial system runs on the US dollar, and the Kremlin is aware of this. But as Russian Security Council Secretary Nikolai Patrushev said on April 26 interview With state media, Russia is now working to create a “double-loop monetary and financial system” in which the ruble would be backed by both gold and commodities “in order to bring the ruble exchange rate in line with the parity of the actual purchasing power. Russia forcing Europe to pay for gas in rubles is just one part of this grand plan.
But there is little reason to believe that this plan will work, with or without ruble payments for Europe’s gas.
The Soviet Union tried to do this before, including a brief “ruble gold” period in the early 1920s, and, for all its ideological fervor, could not make it work. The attempt is much less likely to succeed in Putin’s devoid of ideology state.
Putin is arming his country’s gas supplies and giving up profits that could be made by selling for spot to Poland and Bulgaria, which have refused to renew the contracts, to demonstrate the seriousness of his demand for rubles.
Some European gas companies have already capitulated; reportedly, four European gas companies have already done so. done payments in rubles and others are preparing to do so, included ENI of Italy, despite the European Union warnings.
This could be seen as a Russian victory. But even if EU unity collapses over the issue and gas payments ensure ruble convertibility is maintained for now, Putin is overreacting.
Moscow had been receiving praise for being less overtly political in European supply and price markets before its invasion of Ukraine. I was witnessing beneficial reforms in the EU, arbitration court rulings and market liberalization. The Nord Stream 2 Baltic Sea gas pipeline project, designed to double the flow of Russian gas direct to Germany, was underway.
However, Russia’s aggression in Ukraine changed all this and Berlin canceled the pipeline project in response to Russia’s recognition of its proxies in Donetsk and Luhansk on the eve of the invasion.
Of course, Europe will remain dependent on Russian gas for at least a year or two. But Putin’s actions have already spurred a search for alternatives, including the Baltic Pipeline linking Norway and Poland that is expected to be put up for competition later this year. All of this will only accelerate in light of his decision to suspend gas deliveries to Poland and Bulgaria, which permanently put an end to the idea that Russia will not arm its gas exports.
The EU could increase LNG imports from sources other than Russia by almost 70 billion cubic meters this year, reaching more than 40 percent of what it received from Russia. Maximizing production at the Dutch Groningen gas fields and working with Azerbaijan and Algeria (as well as Turkey and Morocco, through which key pipelines run) could further help address the shortfall.
Before the Ukraine war, Europe had little motivation to quickly reduce its dependence on Russian gas. But Putin’s own actions – first the illegal invasion of Ukraine and then the overt use of gas exports as weapons – created the political will to tackle the problem.
Putin is teaching Europeans that interdependence between Russia and the West has failed as a strategy. But his economy remains a one-trick pony, reliant on commodities and stuck responding to sanctions rather than dealing its own serious blows.
A lesson for Putin can be found in what is known as “Healey’s Law” (named after Denis Healey, the British foreign minister who experienced the difficulty of restoring a country’s finances when he negotiated an IMF bailout in 1976): ” Follow the hole rule; if you’re in one, stop digging.”
As for Europe, Healey’s law contains a corollary that applies: “When your opponent is in a hole, why would you want to take his spade away?”
Putin may have won a short-term victory, but he is digging the grave for Russia’s economy.
The views expressed in this article are those of the author and do not necessarily reflect the editorial position of Al Jazeera.